ATO Audits: Acts of God or can they be avoided?

 

The word ‘audit’ can send chills down the spine of small and medium-sized businesses (‘SMBs’) owners.  But why do they happen? how does the ATO choose who gets audited? and is there anything you can do to avoid them?

Are there risk factors for getting audited?

A commonly-held view is that the self-employed – in particular sole traders and family partnerships – are more likely to be chosen to be audited, as such businesses typically do their own accounting and reporting, instead of going through an accountant.  Additionally, the self-employed are more likely to blend their personal and professional assets and obligations (often out of necessity).

However, this is not the case.  The ATO applies the same standards to the self-employed as they do to SMBs and large businesses.  The ATO has a sophisticated set of benchmarks, algorithms and data-matching technology (comparing figures against those obtained from, say, Centrelink) that flags ‘unusual’ events or activity

Am I in trouble if I get audited?

The ATO selects who is to be audited from ‘unusual’ activity, and in the interest of transparency have provided a list of potential factors on their website. Among the factors are illegal activity – transactions or tax outcomes that are ‘inconsistent with the intent of the tax law’.  However, other more innocuous factors are included – such as large one-off transactions, ‘aggressive tax planning’ and economic performance that is not comparable to similar businesses.  This means that businesses who make sudden changes to their tax planning, make sudden purchases, or simply have a good year might ‘trip up’ the ATO’s data matching and benchmarks, and draw the ATO’s attention.

The ATO’s attention might also be attracted via inaction – i.e. if a business ignores information-gathering requests from the ATO or otherwise acts in a way that doesn’t comply with the expected conduct regarding tax laws.  There may be tax law or Corporations Act conduct breaches that you simply weren’t even aware of.

Can you avoid an Audit?

Short answer?  Not really.  Once the ATO has decided a target, the most you can do is ensure that you have everything you need on hand – such as receipts and other documentation.  It is also important that you are open and honest with the ATO and their investigators, and respond to any requests for information promptly.  The ATO has vast legislative powers available to it if there is a reasonable suspicion that an individual or business is not meeting their tax obligations. For this reason, it is important to get legal advice quickly if you suspect you may have difficulties meeting your tax obligations, or if you otherwise have any concerns about the ATO audit process and powers.

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